Interim
Joint Committee on Economic Development and Tourism

Minutes
of the<MeetNo1>4th Meeting

of the 2004 Interim

<MeetMDY1>September 16, 2004

The<MeetNo2>4th meeting of the Interim Joint
Committee on Economic Development and Tourism was held on<Day>Thursday,<MeetMDY2>September
16, 2004, at<MeetTime>1:00 PM, <Room>at Toyota Motor Manufacturing Kentucky, Inc., Georgetown,
Kentucky. Senator Katie Stine and Representative Eddie
Ballard, Co-Chairs, called the meeting to order, and the secretary called the
roll.

Senator Stine and Representative Ballard thanked Toyota
Motor Manufacturing representatives for hosting the meeting and for the
scheduled tour of the facility.

Senator Stine asked for the subcommittee report from the
Task Force on Economic Development meeting that was held earlier. Senator
Thayer replied the Task Force heard a presentation by Claria Shadwick,
Executive Director of the Kentucky Equine Education Project (KEEP). Ms.
Shadwick explained the economic aspects and impact of the horse industry on
Kentucky’s economy. She also described the threats facing the industry, what
other states are doing, and KEEP’s mission to maintain Kentucky’s position as
horse capital of the world.

Next, Kim Menke, Manager of Community Relations, Toyota
Motor Manufacturing, Kentucky, Inc. (TMMK) welcomed the committee members to
Toyota and thanked them for coming to see the facility. Mr. Menke said he
would discuss the economic impact and the tourism aspects of TMMK. He said
over 30,000 people visited the plant last year from every state and territory,
and 70 different countries. He said TMMK is the largest plant Toyota has
outside of Japan. It is the first wholly owned and operated facility, and the
most complete, in North America. TMMK was established in 1986 with production
beginning in 1988. Mr. Menke said the plant has over 7,000 employees who
reside in 76 different counties. Investment in the Georgetown facility is $5.3
billion with an annual payroll of $519 million. He said TMMK also has numerous
contract and service suppliers. There are over 10,000 people on site
everyday. TMMK builds the Solara, convertible Solara, Camry, and the Avalon.

Mr. Menke noted there are two other Toyota facilities in
Kentucky. Toyota Motor Manufacturing, North America in Erlanger, which employs
approximately 1,000 is the headquarters for all of Toyota’s manufacturing
operations in Canada, the United States (U.S.) and Mexico. He said the
Erlanger facility centralizes purchasing, production control and strategic
planning operations with an investment of over $223 million. The other
facility, he said, is the North American Parts Operations in Hebron. It is the
largest parts center in the country, storing over three million parts. It
employs over 300 people with an investment of $65 million.

Mr. Menke said there are over 70 Toyota suppliers employing
35,000 people at 106 locations around the state. Toyota spends $2.5 billion
through these suppliers.

Mr. Menke noted TMMK has nearly doubled the local tax base
which provides for many community improvements. TMMK has a corporate
contributions program with philanthropic contributions in Kentucky of $22
million. The plant is also ISO 14001 certified.

Across the U.S., Toyota is responsible for nearly 100,000
jobs because of the Georgetown facility, Mr. Menke said. There are ten
manufacturing plants in the U.S. with 13 across North America, having a total
investment of $16.3 billion and an annual payroll of $2.4 billion.

Mr. Menke said Toyota has recently built a cross dock which
is similar to an airport hub. He explained that it is a new concept in
just-in-time delivery that helps suppliers in Kentucky which in turn keeps
inventories at a minimum. It also allows suppliers in Kentucky supply Toyota
facilities in other states as well.

Mr. Menke noted that Toyota has partnered with the city of
Georgetown to build a business park in an effort to bring new companies into
the area.

Mr. Menke said Kentucky and Toyota have been good for each
other. He said the mutual success is possible because of good teamwork between
local and state government as well as the outstanding local workforce. Mr.
Menke said that twenty years ago when Toyota considered the area, Georgetown
had a good infrastructure and Toyota would like to maintain that. He added
that Toyota is working to constantly improve and will be bringing in new and
exciting products in the future. Mr Menke concluded, saying Toyota looks
forward to being in Kentucky a long time.

Senator Thayer presented a citation, on behalf of the
Kentucky Senate, to TMMK for their 2004 Earth Day Award given by the Kentucky
Environmental Quality Commission.

Senator Pendleton asked how many acres the plant occupied to
which Mr. Menke replied 1,300.

Representative Ballard commented that when the incentive
package was awarded to Toyota 20 years ago it was not common practice but it
became the forerunner of the state’s current incentive program.

Representative Webb
noted she was a staff member for staff leadership and did the legal analyst for
the TMMK project and stated she was proud to be a small part of it.

Next, Donna Duncan, Commissioner of Financial Incentives and
Steve Jones, Director of Tax Incentives for the Kentucky Economic Development
Cabinet (KEDC) outlined the Kentucky Industrial Revitalization Act (KIRA). Ms.
Duncan said KIRA was enacted in 1992 and amended in 1994, 1996, 2000, 2001 and
2004. She said it is targeted solely for existing industries that are at risk
of eminent closure who must update their operations in order to retain existing
jobs. She noted most tax incentive programs are available to induce new
investment for the purpose of creating new jobs. She said KIRA is structured
differently than the other programs and has unique requirements.

Mr. Jones explained that in 1992, when the program began,
its premise was to assist manufacturing companies in serious danger of closing
their facilities. There had not been reinvestment in the companies’ operations
to the point where productivity and efficiency had declined significantly. To
qualify, a company must employ or plan to employ 25 people. KIRA was amended
in 2000 to include coal mining and processing companies of sufficient size.

Mr. Jones said expenditures made for fixed assets such as
outdated equipment, structural issues and infrastructure costs are eligible for
tax incentives, or “recovery” under KIRA. The incentives are threefold, Mr.
Jones explained. First, a company can recover income tax credit tied to the
state income tax liability generated from the facility. Second, recovery of
credit against a corporation license tax dealing with the actual project. Third,
the company can realize five percent of the facility payroll through the Job
Revitalization Assessment Fee. Mr. Jones pointed out that the Cabinet does not
like to use the KIRA program.

Mr. Jones next explained the KIRA process. First, an
application is filed after discussions with the company. Once the KEDC reviews
the application for possible approval it is then presented to the Kentucky
Economic Development Finance Authority (KEDFA). Once KEDFA has acted on the
application it grants preliminary approval. Preliminary approval begins the
process. One of the statutory requirements is that an independent third party
consultant examine the validity of the company’s claim that they are in fact
looking at closing their facility. Mr. Jones said typically larger accounting
firms performing the review and payment to them is made by the applicant
companies.

Once the consulting report is done, the findings are
reported back to KEDFA, Mr. Jones explained. A public hearing is then held to
solicit public comments. Then, the applicant would meet with local cities and
counties that impose occupational taxes because both are affected. He said
there is a five percent wage assessment. The state’s participation is four
percent; local government’s one percent. Once local jurisdictions agree to
participate at that level the paperwork returns to KEDFA where a final
agreement (Revitalization Agreement) is drafted. Mr. Jones explained that the
state is contractually obligating these incentives to the companies if in fact
they perform. He said there are clauses whereby reductions in incentives will
be made if employment levels decline and provisions that terminate the
agreement if employment falls below a certain level.

After the final agreement, Mr. Jones explained, companies
have a ten-year period to use the incentives to offset the costs, a maximum of
75 percent of the total project costs, depending on the agreement. For mining
operations, the base contract requires annual delivery of four million tons and
must employ 500 people within the state.

Mr. Jones said KIRA has been operational for approximately
13 years. Currently, there are nine active projects under final agreement that
date back to 1994. KEDC is very careful with the use of KIRA. It is not always
successful and is considered a last ditch effort to help companies remain
viable.

Representative Ballard asked what percentage of companies
are awarded KIRA incentives but still close. Mr. Jones replied one company has
failed.

Representative Brandon Smith inquired as to the length of
the process. Mr. Jones replied that the time from initial application to final
agreement varies mainly because of the consultant’s review.

Representative Brandon Smith asked how many coal companies
have been successful with the KIRA program. Mr. Jones said the Cabinet has had
one application which was approved.

Representative Brandon Smith said he was concerned with the
amount of time needed to complete the process as a failing company has very
little time to recover. Representative Smith said most of the coal industry
has been under long-term contracts and are just getting by, therefore, KIRA
would be helpful.

Representative Brandon Smith asked how the coal companies
should initiate the KIRA process and also if company information would remain
private. Mr. Jones said that until an application has been filed and presented
to KEDFA at a public meeting there is no disclosure by the Cabinet. He said
there is an exemption in the Open Records Act that preliminary discussions
remain confidential.

Representative Brandon Smith asked if KIRA has replaced the
Kentucky Rural Economic Development Act (KREDA). Mr Jones said KREDA is
separate and apart from KIRA.

Representative Brandon Smith asked for an update on coal
severance monies for training. Ms. Duncan said there are now two funds—single
county accounts which, under the new administration was moved to the Department
for Local Government and the KEDC-administered multi-county accounts with funds
primarily being used for attracting industry to industrial parks.

Senator Roeding asked about other programs for companies not
facing difficult times. Mr. Jones said the Kentucky Industrial Development Act
has been used extensively for existing companies doing expansions, and the
KREDA program targets the less-economically-advantaged counties by assisting
growing companies. Senator Roeding said the state must help companies in need
but also must encourage growth, higher production and additional jobs for the
other existing companies in Kentucky.

Next, Representative Ballard introduced Alan McCoy, Vice
President of Government and Public Relations, AK Steel Corporation. Mr. McCoy
said AK Steel, after a number of years leading the industry, has become a
victim of its own success. Most of AK Steel’s competitors have gone bankrupt,
shed their pension and retiree healthcare legacies and have reemerged at
significantly lower costs than AK Steel. As a result AK Steel is trying to
protect its employees, still compete, and lower company costs. He said the
financing provided by KIRA has helped AK Steel in accomplishing this. The
company has very solid customers, including TMMK. Mr. McCoy noted AK Steel has
won awards for delivery and quality at Toyota’s supplier award conference for
the past ten years.

Mr. McCoy said for the last two years AK Steel wavered on
the future of carbon steel making at both their plants. Over the last year
there have been several changes in the company and they are now recommitted to
carbon steel making. The state’s investment in helping finance the Ashland
project is a part of that commitment. AK Steel currently employs approximately
1,200, they have an annual payroll of approximately $70 million, and a total
economic impact of approximately $250 million in the region. Mr. McCoy said AK
Steel is very committed to the Ashland plant and is grateful for the state’s
assistance through the KIRA program.

There being no further business the committee adjourned at
2:00 p.m. to tour the Toyota facility.